You might have noticed everyone is suddenly talking about Cover Protocol.
But what is Cover Protocol? And is COVER a good investment?
Cover Protocol provides decentralized insurance for DeFi users.
It’s a peer-to-peer market that incentives market makers to offer protection for DeFi users, providing coverage that anyone can purchase to hedge against a potential loss of funds.
It launched just a couple of months ago but has already risen to a $66.1m market cap in the top 150 ranks. So what caused this rise?
To answer this question we need to understand the DeFi landscape and the role Cover Protocol plays.
We also need to examine the big news that Cover joined the Yearn Finance Ecosystem, a rapidly expanding DeFi network revolutionizing the industry.
Yearn Finance Ecosystem
Cover Protocol was recently brought into the Yearn Finance ecosystem, a network growing around Yearn, one of the most respected DeFi projects.
This brings many advantages, and Yearn developers have already been helping assess what happened and recommend solutions.
Yearn’s founder Andre Cronje wrote an introduction to Cover Protocol here.
Experimental features available at https://t.co/5d1AQmsaWB
Includes UI interface for Iron Bank & Cover purchase pic.twitter.com/FtqI4y14Ha
— Andre Cronje (@AndreCronjeTech) December 8, 2020
Fellow Yearn ecosystem project Pickle Finance was also exploited and the Yearn team were invaluable, providing new code and helping to get it audited.
The Pickle Finance hack was actually the first claim to go through the Cover claims management system, with holders of the Pickle CLAIM tokens able to receive some compensation.
It’s likely that Cover Protocol recovers from this incident, but those who have been affected may have lost trust in the project and the token price may not bounce back.
Yearn’s founder Andre Cronje wrote an introduction to the project. Andre was DefiPrime’s DeFi person of the year, showcasing just how much value Andre and the Yearn team have had in the ecosystem.Yearn’s founder Andre Cronje wrote an introduction to the project here.
— defiprime (@defiprime) December 16, 2020
What is Cover Protocol and Why is it Crucial for DeFi?
During 2020 DeFi has seen rapid growth, with investors racing to yield farm, lend, borrow and generally be productive with their assets on the Ethereum blockchain.
But while DeFi users have been making huge gains, (sometimes over 500% APR), it can be a dangerous game.
A whole range of things can go wrong. Smart contracts can have bugs and can also be exploited by intelligent hackers. Worst of all, the developers of DeFi projects can run off with everyone’s funds – the infamous ‘rug pull’.
DeFi projects often get their code audited to check for vulnerabilities, but the highly competitive nature of the space often pushes projects to put unaudited insecure code live.
Audits themselves aren’t perfect, as attackers can take advantage of the composability of DeFi projects to design innovative attacks using multiple platforms that were unforeseeable.
Projects like Cover Protocol are huge winners from this DeFi wild west.
Many DeFi users are aware of the risks now, but unwilling to give up the high returns and possibilities DeFi offers.
Decentralized coverage provides the answer.
Users can protect their DeFi investments by buying tokens that can be redeemed for more in the event of a hack.
What Is Cover Protocol Exactly?
Cover Protocol is the first project offering coverage in a fully decentralized way without needing KYC (know your customer) approval.
It is an open coverage market. It’s peer-to-peer, meaning that users can be rewarded for providing coverage for a project, and other users can be reimbursed if an event happens just by holding the appropriate tokens.
Cover Protocol manages to provide coverage liquidity by incentivizing markets, attracting users to offer their capital in exchange for a high yield return.
A market maker deposits DAI (a decentralized dollar-pegged stablecoin), and for every $1 deposited receives one CLAIM and one NOCLAIM token. The market maker can use these tokens to create a swap pool, an automated market maker (AMM). Other users can use this pool to get hold of CLAIM tokens and be eligible for coverage in the event of a problem with that particular protocol.
If this happens holders of the CLAIM token will be able to exchange their token for the deposited $1 of collateral. In this event the NOCLAIM tokens become worthless.
If no claim occurs against the chosen DeFi protocol within the coverage period then the NOCLAIM tokens can be used to redeem the $1 collateral, with this event making the CLAIM tokens worthless.
Through this design an open market is established for each DeFi protocol, allowing users to trade between CLAIM and NOCLAIM tokens, with the market creating token price relative to the perceived risk of the specific protocol.
Is Cover Protocol a Good Investment Now Or Am I Too Late?
Recently the project has experienced a meteoric rise, growing almost 500% in the last 16 days.
One COVER token is now worth $1235.00, so is Cover a good investment now, or is it too late?
To understand this we need to understand why the project grew so much.
The main reason for the rise was the announcement that Cover had merged with the Yearn Finance ecosystem, a rapidly growing DeFi ecosystem. Yearn has been described by some as the Amazon of DeFi, rapidly expanding and providing a full suite of decentralized finance tools.
The takeaway is that Cover Protocol is being used as a core part of a huge ecosystem worth over a billion dollars, and rapidly growing. Anyone who wants to protect their Yearn ecosystem interactions, whether that’s borrowing or lending with Cream, yield farming with V2 vaults, or providing liquidity through Sushiswap’s AMMs will use COVER. Not just this, users will be able to access the Cover Protocol through the Yearn interface to gain coverage across any other DeFi project.
The integration will see Yearn’s large user-base directly exposed to the Cover Protocol. Cover stands to gain from not just the number of users but the strong reputation Yearn holds in the industry, with some of the best smart-contract developers around.
Merry Christmas and Happy Holidays from the Yearn Ecosystem! =)
— Cover Protocol (@CoverProtocol) December 24, 2020
Yearn integrated projects benefit from the network effect of the ecosystem, the bigger each individual project grows, the more every other connected project benefits. Cover Protocol may have only just launched, but as a core part of the Yearn ecosystem, they are set to rapidly scale as a crucial infrastructure in a billion-dollar ecosystem.
COVER is the protocol’s governance token, and holders vote via Snapshot to signal their support for or against any covered claim.
The COVER token is distributed as a reward to those who establish protocol markets, and the amount distributed is halved every year. You can think of it as an accelerated Bitcoin halving.
There will be less and less COVER released to the market, but the protocol itself is set to rapidly grow. That’s because Cover Protocol is an open coverage market – it’s not just limited to DeFi.
Anybody can create a coverage market for anything. In this way, the protocol can expand to become the world’s coverage market, and that’s exactly the stated mission of the project.
With such a big ambition Cover Protocol can scale to become a global, permissionless coverage market.
If the project can succeed here there will be a huge demand for the COVER token. The limited supply however will likely mean that demand will carry the price far beyond its current low market cap.
People are still asking what is Cover Protocol because the project is incredibly early. The Yearn Finance ecosystem recognized the huge potential of this project, but even with the recent price increase, the market is still lagging far behind.
Why Is Cover a Good Investment?
It’s highly likely Cover Protocol will see massive adoption – it provides a greatly needed decentralized service far outstripping its competitors.
If this happens COVER may just be one of the best investments this bull season, as the bigger Cover Protocol grows, the fewer COVER tokens there are to go around.
Cover Protocol is definitely a project to keep your eye on.
Disclaimer: The information in this article is for educational purposes only. Please do not treat it as investment advice. Do your own research.
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